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Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework

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  • Moore, Rachel
  • Pecoraro, Brandon

Abstract

Fiscal policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate present tax law and proposed reforms. We argue that the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. In this paper, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that explicitly models key provisions in the Internal Revenue Code applied to labor income. While both approaches generate similar policy-induced patterns of economic activity, we find that the similarities mask differences in key economic aggregates and welfare due to variation in the underlying distribution of household labor supply responses. Absent sufficient tax detail, analysis of specific policy changes - particularly those involving large, discrete effects on a relatively small group of households - using heterogeneous-agent models can be unreliable.

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  • Moore, Rachel & Pecoraro, Brandon, 2018. "Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework," MPRA Paper 87240, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:87240
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    1. Macroeconomic Implications of Modeling the Internal Revenue Code in a Heterogeneous-Agent Framework
      by Christian Zimmermann in NEP-DGE blog on 2018-10-10 14:52:57

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    1. Moore, Rachel & Pecoraro, Brandon, 2019. "Modeling the Internal Revenue Code in a heterogeneous-agent framework: An application to TCJA," MPRA Paper 93110, University Library of Munich, Germany.
    2. Rachel Moore & Brandon Pecoraro, 2020. "Dynamic Scoring: An Assessment of Fiscal Closing Assumptions," Public Finance Review, , vol. 48(3), pages 340-353, May.
    3. Martino Tasso, 2020. "Do details matter? An analysis of Italian personal income tax," Temi di discussione (Economic working papers) 1301, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    dynamic scoring; tax policy; tax functions and calculators; heterogeneous agents;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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